By Brandes Elitch
CrossCheck Inc.
I attend several conferences each year and meet people with diverse perspectives on payments: bankers, bank core processors, card processors, software developers and, of course, the people who make it all happen: ISOs and merchant level salespeople (MLSs). Today, the ground is shifting under their feet, and they are working overtime to process new developments. They often speak with me about check guarantee services, typically stating:
Of course, none of these statements is true. Now, let's look at the numbers by dollar amount and transaction type for the different payment types and see what's real. The data is from The Federal Reserve Payments Study 2016. It doesn't include online payments and monthly payments to pay bills. These numbers are from retail sales, where most ISO efforts are focused.
Now, what do the numbers show? First, more than 17 billion checks were written in 2016. So much for the notion that checks are going away. Small merchants now take debit cards instead of checks, which makes sense, as the average debit card transaction is less than $50, and one third are less than $10.
But when there is a high-dollar ticket, over $1,000, the merchant will tell you to take out your checkbook instead of a card. The gross margin for car dealers, for example, is less than 2 percent. They won't pay an interchange fee greater than that just to let customers accrue points on their cards. Also, check guarantee costs a fraction of interchange, makes sales happen immediately and gives consumers more time to come up with the money without applying for credit or paying interest. So payments from checking accounts will be around for a long time.
Most American consumers are living paycheck to paycheck with limited cash on hand. A study by Springleaf Financial indicated nearly 25 percent of consumers have less than $250 in the bank on a given payday. Twenty percent of those making over $200,000 annually stated they save rarely or not at all. About 25 percent of people with graduate degrees said they could not miss a month of pay without needing to borrow money or sell assets. A new poll by CreditCards.com found that 41 percent of adults don't know when they will be able to pay off their debt; 25 percent expect to carry debt to the grave. The most common debt is mortgage (54 percent) followed by credit card (53 percent) and auto loan (47 percent).
Of consumers in households that make $30,000 to $50,000, 71 percent owe credit card debt, compared with an average 53 percent across all income brackets. One study (ValuePenguin) shows average debt per household at $5,700 and average debt for balance-carrying households at $9,333. These consumers do not want to get stuck in debt traps where they revolve balances at 26 percent because they didn't pay the full amount owed within six months of purchase.
Second, people use debit cards for small dollar transactions and credit cards for higher dollar transactions. The number of debit card transactions is over twice those of credit cards, although total dollars spent with debit cards is about 81 percent of total credit card spend.
Third, the 2016 Federal Reserve study stated, "Data from the Federal Reserve's Diary of Consumer Payment Choice shows that cash remains the most frequently used payment instrument, accounting for 31 percent of all consumer transactions." So much for the comment that cash is going away quickly.
Fourth, regarding mobile payments, it would be more closely reflect reality to say nobody is using mobile payments yet, rather than assert that everybody is using mobile payments. A study last year by JPMorgan Chase showed only about 36 percent of merchants accept digital wallet payments, and only 16 percent of consumers have tried to use one. This might be because it's easier to insert a card into a terminal than to take out a device and activate an app. Mobile payments will become ubiquitous at some point; it just hasn't happened yet. As for real time payments (RTP), two entities are competing: The Federal Reserve and The Clearing House, which is owned by the 11 largest banks. TCH has an RTP solution, but it reaches only about half U.S. checking accounts. If you add up all the commercial banks, credit unions and savings and loans, there are 11,000 financial institutions in this country. And community banks will be skeptical of sending transaction to their direct competitors: the largest banks in the country. The Fed doesn't have an RTP product yet, but a solution is in the works.
The automated clearing house (ACH) has been around for a long time and is not a government entity. It started as an industry work group founded by the largest banks so they could settle transactions among themselves. These banks are called originating depository financial institutions. They hold over 75 percent of all checking accounts and are the largest receiving depository financial institutions for the same reason. They call the shots.
Typical recurring ACH debits to consumer checking accounts are monthly bills that must be paid on time: life insurance, electricity, home security system, car loan, credit cards, etc. Debiting an account is far easier for billers than preparing and mailing paper bills, waiting for them to arrive, and then waiting for customers to write checks and mail them back. As for ACH credits, most people now have direct deposit of payroll; that is what's driving that number.
The type of payment used is correlated to the merchant taking that payment and the consumer making the payment. If it is a fast food store, discount store, supermarket or gas station, the debit card will be the primary form of payment. If the ticket price is over a few hundred dollars, most consumers will use a credit card for the loyalty or rewards points. If it's a high dollar sale, the merchant will prefer a payment that does not involve interchange.
When discussing what this means for the industry's feet on the street, I want to begin by putting to rest another canard: the retail apocalypse caused by the dominance of Amazon, too many malls, dying brands, the demise of Sears, etc. ISOs thrive on serving the 7 or 8 million small businesses that are real businesses, not tax shelter entities. According the National Retail Federation, overall U.S. retail sales have grown almost 4 percent annually since 2010. Retailers in fast-moving consumer goods, specialty goods and food service are thriving, growing over 10.5 percent over the last year, compared to 5.9 percent for the whole middle market retail segment and 8.6 percent for the overall middle market (reported by the 3Q 2018 Middle Market Indicator).
E-commerce is growing. Malls are evolving into customer experience destinations. Omnichannel commerce is growing. Amazon's growth will level out because, as Paula Rosenbloom said, in Retail Systems Reseller, "No market is infinite, and every business has to ultimately make money." Retailers have matched Amazon, the playing field has been leveled, and Amazon still has to deal with shipping.
As ISOs and MLSs, call on middle market retailers in person and explain how you can help them make sense of all the new developments in payments. They will want to listen to you, because this sort of thing cannot be explained over the phone, and these retailers can't figure it out themselves. Go to the stores; see what merchants are doing now, how they are doing it and what their pain points are. If you listen carefully, you will help merchants find solutions, and you will get the accounts. And that opportunity is not going to change in the coming year . 
Brandes Elitch, director of partner acquisition for CrossCheck Inc., has been a cash management practitioner for several Fortune 500 companies, sold cash management services for major banks and served as a consultant to bankcard acquirers. A certified cash manager and accredited ACH professional, Brandes has a Master's in Business Administration from New York University and a Juris Doctor from Santa Clara University. He can be reached at sbrandese@cross-check.com.
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